Internet of Things: how to identify the best business opportunities?

The list of new products and services that are presented as “Internet of Things” (IoT) applications is growing at an amazing speed. Tens, if not hundreds of new IoT services or smart/connected objects are announced everyday, and the application domains they are designed to address are extremely diverse.

One reason behind both the high rate of new product introduction and the large application diversity is that most of the basic technological components used in the IoT realm have been around for some time. The components are therefore easily accessible, and designing a new IoT product or service is, by and large, an exercise in system integration. This contrasts with other “technology-intensive” products where most of the required R&D investment actually goes into developing the basic components.

The scope of this paper is to draw the attention of engineering managers and business stake-holders to a few key points they should consider when they approach a new IoT project so they can decide where to focus their technical and financial resources.

What is the “Internet of Things” ? Or rather, what is it not ?

The term IoT is deliberately generic, and we believe that there is no point in trying to formulate an accurate or rigorous definition. As a matter of fact, typing “define: IoT” in a Google searchyields a virtually limitless list of results, and although none of them can serve as a precise definition of what the Internet of Things is, they can all broadly describe at least what the Internet of Things is about. Anyway, in the scope of this paper, any system or service built out of networked devices that provide useful machine-to-machine or human-machine functionality, and that may or may not inter-operate with the Internet infrastructure, can be considered as a valid instance of IoT or Smart Objects scenarios.

There is a growing consensus around the fact that IoT is affecting the way people live and work everyday, and that it will increasingly do so in the future. Of course, IoT is not a matter of “cool gadgets” flooding the market, it is more about understanding the disruptive power of embedding virtually any kind of device, from street lamps to cars, from home appliances to heart-rate monitors etc. into a global communication network. IoT is introducing new business models into existing markets, sometimes changing the market itself in a very fast and disruptive way.

A typical example of a company with a new disruptive business model is Uber, whoare truly transforming public transport on a global scale. “Uberization” is a new word in our vocabulary coined to express the fact that conventional, or “unconnected” businesses risk being taken over or being displaced by new entrants that use the internet to bypass or replace captive customer-supplier channels, or to de-facto deregulate markets. But beyond the cases of disruptive change, it is important to look at other examples where IoT technology brings key benefits to large portions of the world population or to the environment. The SmartGrid developments around the world represent a very powerful example of how increased connectivity can decrease energy waste, or virtually prevent dangerous and very expensive electricity black-outs.

What IoT represents as a business opportunity

There is a lot of market research material publicly available about IoT, and a vast choice of reports from all the major market research firmsExpectations are very high, and looking at the Gartner “hype cycle” for new technologies, IoT is today at the peak of the cycle, i.w. IoT business expectations are today at their highest compared to all other new or emerging technologies (Figure 1).

(Figure 1 ) Gartner “Hype Cycle”, July 2014

Since most of IoT’s enabling technologies are already in place and there is the potentiall for IoT to penetrate almost every single human activity, we are inclined to put aside criticisms of “peak-hype” and to believe Gartner’s prediction that IoT will reach the “plateau of productivity” in 5 to 10 years. As the IoT’s economic impact is extremely large, even under the least optimistic scenario, grabbing even a small piece of the huge IoT pie between now and 2020 is definitely worth focusing on for many technology-oriented players.

With this in mind, let’s have a closer look at how IoT market sizing and economic value estimations are put together, and what they imply in terms of market dynamics.

The majority of the IoT market projections are built by estimating the growth in the demand for business-to-business and business-to-consumer (B2B and B2C) services taking into account services either available today, or expected to appear over the next few years. New services may arise either due to the Uberization of existing services, or due to new kinds of devices that are expected to induce the creation of new kinds of services. The projected service demand is then given a commercial value estimation, and it is added to the estimated value of all the manufactured goods that are required to build the various types of services. In addition, the projected savings that certain IoT-based services will bring compared to the corresponding existing services is also added to the overall market value.

It is clear, therefore, that depending on the assumptions concerning IoT service demand, the resulting market numbers can have very significant variation. Despite this whatever the source used, the numbers all look impressive, whichever part of the IoT space is considered. There are a few figures which we want to mention here because, even if they are hard to correlate with one another), they illustrate the tremendous economic potential of the global IoT opportunity.

In a 2003 report, McKinsey estimated that by 2025 the yearly economic value of IoT will be somewhere between 14 and 33 trillion dollars. To put these figures in perspective, the 2014 GDP of the United States was 17.5 trillion dollars – these are huge numbers. McKinsey’s estimate is interesting because of their large margin of variation, which take into account the high degree of uncertainty of several global markets growth and the important variation in the overall perimeter of IoT market constituents.

Other sources report the number of connected objects expected over the next 5 years. For example IDC’s prediction is that the total number of connected objects will be 28 billion by 2020, which is about 3.6 times the projected world population. Again, IoT numbers are impressive, even considering the least aggressive scenarios.

A very important point emerging from the majority of the market reports and projections is related to how the market value is distributed over the IoT value chain (figure 2): the largest share of the global market value is in fact taken by system integrators and service enablers, which combined account for 45-60% of the total value (source Arthur D. Little). In other words, most of the value in IoT products and services is captured by the companies that develop and support system-level solutions for service providers, which confirms our understanding that the IoT industry is primarily driven by the innovation and the capabilities provided by the system integrators, and to a smaller degree by the companies that develop core IoT components and smart objects.

We believe also that the companies operating within the system-integration segments of the IoT value chain have the most favorable return on investment. The profit margins and the average speed required to convert R&D investment into revenues vary considerably from one application segment to another, depending primarily on the extent to which the end-product or service is required to comply to either governmental regulations or to stringent and complex quality or safety standards.

(Figure 2) IoT Value Chain

IoT System Components

As mentioned above, the collection of products and services that the term IoT generally refers to is extremely large and heterogeneous, it is therefore a challenge to classify exhaustively and accurately all of its possible components. With the drawing in figure 3 we give a very high-level description of the major components of the products and services that we are addressing in this paper. They are organized by main market segment (far left column), grouped by components (vertical rectangles), and by major networking strategies used to connect the edge devices all the way to the end user (horizontal rectangles).

(Figure 3) IoT, Smart Objects, Connected Devices: the main market segments, and their system components

End points, also referred to as IoT edge components, are represented by small icons on the left side of the drawing. These are typically the “things” of the IoT acronym. They can indeed be pretty much anything: temperature sensors, smoke detectors, smart consumer appliances, garage door locks, and so on.

Users’ terminals, on the far right of the drawing, interact with the IoT end points by communicating application and control data via a variety of networking protocols. The expression “Big Data” is often related to large databases populated with information coming from the IoT edge. Examples of end-user’s applications in this scenario are, again, very heterogeneous: monitoring of travelers’ routes congestion points through an airport, statistical distribution of customers’ in a shopping mall, or grain management systems in the agriculture industry, etc.

And of course there is a growing list of smart objects, and more generally “connected devices”, in consumer or multi-market applications that communicate among them or with end-users terminals directly, without going through the Internet infrastructure, for instance using wireless personal area networking such as BlueTooth, or local WiFi networking. Although such objects do not necessarily use the Internet to function, they are loosely associated to the IoT market. Examples here are smart light bulbs, video-surveillance cameras, HVAC systems, sport and fitness products, etc.
As it was mentioned earlier, most of the technologies used in IoT have been used for several years already, the most obvious cases being represented by the Internet itself and its infrastructure’s building blocks, or the BlueTooth connectivity, originally born and raised in conjunction with the large-scale deployment of mobile phones.

Other technologies however appeared to address specifically IoT applications and use cases, most notably a variety of wireless networking solutions developed to build the communication infrastructure of wireless sensors networks. This is a vast area of work where key innovation has been humming for the last few years, and it still represents a fertile ground for various players to differentiate and therefore increase competitiveness, not only in terms of system-integration know-how, but also possibly at the level of core technological components.